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Reasons Why Your Application for Credit Was Turned Down

When you apply for a credit card, auto loan or mortgage loan and are denied, lenders usually base this decision on your FICO credit score, which is a mathematical score based on (1) how you have paid your bills; (2) amount of outstanding debt; (3) how long you've been using credit; (4) how often you apply for new credit; and (5) what types of loans you have applied for and used. 

When lenders order your FICO score from any one or all three of the big credit reporting agencies -- Experian, Equifax and TransUnion -- they are given, not only your FICO credit score, but also a list of the four major reasons why your score is not higher.  Reasons given to lenders are based on any one or all of the categories 1-5 listed in the first paragraph and are as follows:

(1) How well have you paid your bills?  Reasons for denial:

  • Delinquency (ies) on accounts
  • Time since delinquency is too recent or unknown
  • Too many accounts with delinquencies
  • Too few accounts currently paid as agreed
  • Too few accounts with recent payment information
  • Recent derogatory public record or collection notation
  • Derogatory public record or collection account (lien, garnishment, suit)

(2) How much debt do you have?  Reasons for denial:

  • Amount owed on accounts is too high
  • Amount owed on revolving accounts is too high (credit cards)
  • Too many accounts with balances
  • Proportion of balances to credit limits is too high on revolving accounts
  • No recent revolving account balances

(3) What is your credit history?  Reasons for denial:

  • Account payment history too new to rate
  • Length of credit history is too short
  • Length of revolving credit history is too short
  • Lack of recent revolving account information
  • Lack of recent installment loan account information
  • No recent non-mortgage balance information

(4) How often do you apply for new credit?  Reasons for denial:

  • Too many recent inquiries in the last twelve months
  • Too many accounts opened in the last twelve months
  • Date of last inquiry too recent

(5) What types of loans do you have?  Reasons for denial:

  • Too few bank revolving accounts (usually credit cards)
  • Too many bank revolving accounts (usually credit cards)
  • Consumer finance accounts (loans with a finance company can hurt your score)
  • Number of established accounts  (usually too few, but sometimes too many)

Note:  If you don't use your revolving accounts (credit cards) over a long period of time, the lender will stop reporting your payment history and your FICO score will decrease since FICO can't measure how you are using and paying for credit recently.  It is a good idea to use your credit cards every few months to keep your creditors reporting your payment history, but pay the balances in full when you receive the bills to avoid finance charges. 

Related topic:  How to Establish a Credit Rating
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